A stagnant farm economy that has slowed Nebraska and Iowa's income growth to the lowest levels in the nation is also contributing to state budget problems that could linger through next year, officials said.
Key lawmakers from both states said they're concerned the agricultural downturn will persist, ripping through other sectors and putting additional strain on their budgets.
Declining farm income was the leading cause of the slowdown in many states, including Iowa and Nebraska, according to the U.S. Bureau of Economic Analysis. The sluggish growth also hurt agricultural manufacturing, lending, land-rental income and other industries tied to farming, officials said.
"Our farmers have been hurting, and they've been hurting for some time now," said Nebraska State Tax Commissioner Tony Fulton. "The fact of the matter is it's a big deal in Nebraska."
Nebraska and Iowa posted the slowest income growth in the second quarter of 2017, according to the bureau report released last week. Incomes increased by just 0.1 percent in both states, compared to a 0.7 percent average nationally.
Farm incomes have fallen because of a glut of corn and soybeans that lowered commodity prices. Agriculture is the largest industry in both states.
Iowa showed strength in other areas of its economy, such as finance, insurance and non-durable manufacturing, but those gains were offset by the farm slowdown, said John Fuller, a spokesman for the Iowa Department of Revenue.
The nonpartisan Iowa Legislative Services Agency reported this summer that incoming revenue for the last budget year fell about $100 million short of projections, but cautioned that the number could fluctuate. Officials with Republican Gov. Kim Reynolds later announced the shortfall was closer to $14.6 million.
In Nebraska, lawmakers relied on a combination of cuts, spending delays and emergency funds to close what had been a projected $900 million budget shortfall. Senators cautioned, however, that the budget problems could persist into future years partly because of the farm economy and partly because of a series of tax cuts and exemptions for businesses approved in recent years.
Nebraska's individual income and sales taxes are the state's two largest revenue sources, and sluggish growth in either slows the flow of tax collections.
Many farmers padded their savings during the boom years to protect themselves, but aren't generating as much income that can be taxed, said Sen. John Stinner, the Republican chairman of the Nebraska Legislature's Appropriations Committee.
"Obviously, our revenue is going to dictate what (bills) we prioritize," said Stinner, of Gering.The decline follows several boom years with high commodity prices and rising farm incomes, triggering a surge in production as more farmers scrambled to take advantage. High oil prices at the time also increased demand for ethanol, creating an even greater global desire for corn, said Dan Corrin, an economist for the Bureau of Economic Analysis.
"You had farmers planting more and more corn and more and more soybeans, and the supply became saturated," Corrin said. "Demand from other countries began to level off."
Both states may have to endure the situation for the next few years.
"I don't see any reason to expect a rapid recovery," said Iowa State University economist Alejandro Plastina, who specializes in agricultural economics. "There's strong demand for corn and soybeans, but worldwide there's so just so much in stock that it keeps prices subdued."
Plastina said Iowa's revenue shortfall was driven by the agriculture and its ripple effect on other businesses such as seed and machinery dealers and local banks.
Agriculture accounts for less than 10 percent of Iowa's overall economy, but when related industries such as equipment manufacturing and ag lending are included, it makes up nearly half of the state's economy, Plastina said.
Iowa state Sen. Charles Schneider, a West Des Moines Republican, said the slowdown in his state demonstrates the need to reduce spending. Democratic lawmakers said have corporate tax credits are partially to blame for the budget problems.
"One of the lessons I hope we've learned is it's important to manage the rate at which government spending increases," Schneider said.
Fulton said Nebraska has seen sluggish revenue from capital gains as well, suggesting that some investors may be waiting to see what will happen with the Trump administration's proposed tax package. "There's a theory out there that folks are hanging onto their gains until they know how they're going to get taxed," he said.
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